Drug & Alcohol Addiction: Navigating the Tax and Financial Aspects

Article Highlights:

• Potential medical deductions
  o   Medical dependents
  o   Divorced parents
  o   Medical AGI limitations
• Employment Issues
• Employee Assistance Programs (EAPs)
• Charitable Contributions

Navigating the complexities of drug and alcohol addiction poses not only profound personal and health challenges but also significant financial and tax-related hurdles. As individuals strive towards recovery, understanding the intricate web of tax issues becomes crucial in managing the economic impact of addiction. This includes the potential for deducting treatment expenses, understanding the implications of unemployment and disability benefits, and leveraging employer- critical support systems. By shedding light on these tax nuances, those affected by addiction—along with their families and employers—can better navigate the path to recovery with informed financial strategies, helping to alleviate some of the burdens associated with this widespread social issue.

Medical Expenses: Alcoholism and drug addiction are treated as medical ailments for tax purposes. People with addictions often cannot quit on their own; addiction is an illness that requires treatment. Generally, treatment expenses are tax deductible as itemized deduction medical expenses subject to the 7.5% of AGI deduction floor. Possible deductible expenses include the costs of:

• Doctors
• Prescribed medications
• Laboratory testing
• Psychological services
• Treatment programs
• Inpatient treatment at a therapeutic center for alcoholism or drug abuse, including meals and lodging furnished as necessary incident to the treatment
• Counseling
• Behavioral therapies

To claim these expenses for someone other than the taxpayer, the person must have been the taxpayer’s dependent or spouse either at the time that the medical services were provided or at the time that the expenses were paid.

Medical Dependent: Tax law does include a special provision that allows medical expenses to be deducted for an individual who does not meet all the requirements to qualify as a dependent. A person generally qualifies as a “medical” dependent for purposes of the medical expense itemized deduction if:

1. That person lived with the taxpayer for the entire year as a member of the household (temporary absence to obtain medical treatment is an exception) OR is related to the person,
   
   
2. That person was a U.S. citizen or resident or a resident of Canada or Mexico for some part of the calendar year in which the tax year began, and
   
   
3. The taxpayer provided over half of that person’s total support for the calendar year.

The medical expenses of any person who meets these qualifications may be included even if he or she cannot be claimed as a dependent on the taxpayer’s return.

Thus, the dependent’s age and income are not limiting factors in determining whether an individual is a dependent for purposes of deducting their medical expenses.

For example, suppose an adult child has an addiction problem. Even though the child is an adult and generates an income, a parent may still be able to deduct medical expenses that he or she pays for the adult child if the three requirements above are met. The parent must pay the medical service providers directly and not just give the money to the dependent to pay the bills.

In the case of divorced parents, if either parent qualifies to claim a child as a dependent, then each parent can deduct the medical expenses each paid for the child. However, consider the limitations (discussed below) that might preclude any deduction for one of the parents, and plan payments accordingly.

Two situations will prevent a taxpayer from deducting otherwise eligible addiction-related medical expenses. The first is that medical expenses are only allowed as an itemized deduction to the extent that total medical expenses exceed 7.5% of the taxpayer’s adjusted gross income (AGI). The second hurdle is that if the taxpayer’s standard deduction amount is greater than the total of all allowed itemized deductions, there’s no tax benefit to itemizing, and therefore, no medical expenses would be deductible. For 2025 and 2026, the standard deduction amounts are:

 

A taxpayer, and spouse if married, age 65 and older, or blind, is allowed an additional standard deduction amount:

For 2025: $2,000 for single and head of household status; $1,600 for married (either joint or separate) and qualifying surviving spouse.

For 2026: $2,050 for single and head of household status; $1,650 for married (either joint or separate) and qualifying surviving spouse.

As you can see, these and other tax rules related to medical deductions can become complicated. If you need assistance in planning medical expenditures for maximum tax benefits or determining whether you can deduct certain expenses, please call.

Employment Issues: Substance addiction affects individuals’ ability to maintain consistent employment, which in turn impacts their financial stability. Understanding the interplay of unemployment benefits, disability, and worker’s compensation is crucial for those navigating recovery and the fiscal challenges it brings.

• Unemployment Benefits - Unemployment benefits serve as a critical financial lifeline for individuals who have lost their jobs. However, eligibility and applicability for those struggling with drug or alcohol addiction can be complex. Generally, to qualify for unemployment benefits, an individual must have lost their job through no fault of their own. If an individual is terminated due to substance abuse, eligibility may be jeopardized unless they can demonstrate efforts toward rehabilitation.
  
  In some cases, if an addiction causes temporary loss of employment but the individual is actively seeking treatment, they may still qualify for unemployment benefits. This scenario underscores the importance of pursuing a documented treatment plan, which not only aids recovery but also demonstrates to unemployment agencies the commitment to rejoining the workforce.
  
  Unemployment compensation is taxable for federal purposes, but some states do not tax this type of income.
  
  
• Disability Benefits - Disability benefits become relevant when substance addiction leads to severe health issues, rendering an individual unable to work. Programs such as Social Security Disability Insurance (SSDI) and Supplemental Security Income (SSI) can provide support, contingent upon meeting specific criteria.
  
  o    SSDI - For SSDI eligibility, the addiction itself must not be the primary reason for the disability claim; rather, it must result in long-term physical or mental impairments. Conditions like liver disease or severe mental health disorders stemming from substance abuse may qualify an individual for these benefits, provided thorough medical documentation is presented. SSDI, like regular Social Security income, may be federally taxable depending on the individual’s total income. Some states do not tax Social Security income.
  
  o    SSI - SSI, on the other hand, is need-based and requires that the disability be separate from the addiction itself. Both programs necessitate a solid medical history that articulates how the addiction-induced condition inhibits the capacity to work. SSI is not taxable.
  
  
• Worker’s Compensation - Worker’s compensation offers another avenue of financial relief, primarily in the context of workplace injuries or conditions exacerbated by addiction. It typically covers medical expenses and lost wages due to work-related injuries or illnesses. However, if substance use is found to be a significant factor contributing to a workplace accident or injury, the claim may be denied. Generally, worker’s compensation payments are not taxable, but if the payments are received for non-occupational injuries or sickness, they would be taxable. Also taxable are salary continuation payments and certain retirement benefits if they are not strictly for a work-related injury.

Employers and insurers often scrutinize worker’s compensation claims involving substance use more critically. Nevertheless, if an addiction can be shown to have developed because of job-related stressors or untreated mental health conditions exacerbated by work environments, it may still be possible to navigate a successful claim. Legal counsel specializing in worker’s compensation is often beneficial in such complex cases.

Employee Assistance Programs (EAPs): Are workplace-based intervention programs designed to support employees dealing with personal issues, including addiction to drugs or alcohol, that might impact their job performance, health, and overall well-being. Employers offering EAPs that focus on mental health and support can deduct costs associated with these programs as business expenses.

• Confidential Support Services - EAPs offer confidential support services, providing a safe space for employees to seek help without fear of stigma or job loss. These programs typically include access to counseling services, where individuals can discuss their struggles with addiction and receive professional guidance. This confidentiality is crucial in encouraging employees to seek help early, thereby preventing the escalation of addiction-related issues.
  
  
• Education and Prevention Programs - In addition to direct support for those currently dealing with addiction, EAPs often conduct educational workshops and training to inform all employees about the risks of substance abuse and methods of prevention. These programs can help cultivate a healthier workplace culture that proactively addresses substance use issues before they develop into significant problems.

Charitable Contributions:

• Cash Contributions - Contributions to qualified addiction support groups or charities are deductible, offering indirect financial support for both donors and beneficiaries.Starting after 2025, a new law allows nonitemizers to deduct up to $1,000 ($2,000 for joint returns) for cash contributions to qualified charities. This deduction is claimed in calculating taxable income, but does not reduce the donor’s AGI.
  
  
• Volunteering and In-kind Contributions - While donating time is not tax-deductible, out-of-pocket expenses incurred during volunteer activities, such as travel costs to and from addiction support centers, can be deducted when itemizing deductions.

Contact this office with questions or assistance.

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